Longer term constraints risk stranding over a million barrels a day of potential oil growth
CALGARY, Dec. 17, 2012 /CNW/ - While pipeline expansion in 2013 will add nearly a million barrels a day of capacity, it won't be enough to eliminate the discount Canadian producers are getting for their oil, finds a new report from CIBC World Markets.
The report notes that while the consensus view is the new Seaway expansion (250,000 barrels a day in Q1/2013) and the south portion of Keystone XL (700,000 barrels a day in late 2013) will solve the pricing gap faced by Canadian producers, detailed analysis shows otherwise.
"In our view, they will help narrow the Brent-West Texas Intermediate discount but that discount will remain in the US$10 a barrel range," says CIBC oil and gas equity analyst, Andrew Potter. "Our rationale is that these new pipes simply push the current (Midwest) PADD 2 glut into (Gulf Coast) PADD 3, which will knock out PADD 3 light oil imports in early 2013 and prompt Light Louisiana Sweet (LLS) pricing on the Gulf Coast to begin discounting vs. Brent."We believe LLS will move to an approximately US$5 a barrel discount vs. Brent. And WTI will move to a transportation discount vs. LLS of approximately US$5 a barrel, leading to a long-term Brent-WTI differential of US$10 a barrel. We believe consensus expectations overstate the value of domestic oil producer exposed to this theme and understate valuations of Brent-exposed and downstream-exposed producers." Mr. Potter says the bank's modeling shows North American oil production can grow by approximately 800,000 barrels a day per year through 2016. The growth can be distilled down to approximately 500,000 barrels a day per year from U.S. on-shore oil; ~45,000 barrels a day per year from U.S. offshore; ~100,000 bbl/d per year from Canadian light oil; and ~230,000 barrels a day per year from the oil sands. Over this same period this growth is offset by ~100,000 barrels a day per year decline in Mexican production.